EUR/USD
The Euro pushed to a high of 1.3460 against the dollar on Friday, but was unable to sustain the gains and weakened back to the 1.3350 area ahead of the US open.
The US economic data maintained the slightly disappointing theme of the previous few days. Retail sales rose a headline 0.6% for December with a core 0.5% rise and this was still a healthy underlying trend following a core increase of 1.0% for November.
Industrial production rose 0.8% for the month, but there was a decline in the University of Michigan consumer confidence index to 72.7 from 74.5 the previous month. This outcome was surprising given that most other surveys had indicated improved confidence. The net impact was that yield spreads failed to move in the dollar’s favour which curbed immediate demand for the currency.
Ratings agency Fitch cut Greece’s credit rating to below investment grade, but the other two main agencies had already lowered the rating. Immediate fears surrounding the credit outlook remained slightly lower, but longer-term confidence remained extremely fragile. The meeting of Euro-zone finance ministers on Monday and EU ministers on Tuesday will be watched closely for further policy comments surrounding the EU support fund.
The evidence suggests that efforts to increase the fund will be resisted for now. There will still be fears that EU governments are not prepared to counter any fresh market attack on the Euro and the currency was unable to regain the 1.34 area as it consolidated near 1.3340 in Asia on Monday with markets liable to be quieter due to US markets being closed for a holiday.
Source: VantagePoint Intermarket Analysis Software
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Yen
The dollar dipped to lows just below 82.50 against the yen on Friday and also dipped to test support near this level following the US data, but there was solid US buying support on dips.
Although the yen gained some initial support from a further increase in China’s reserve requirements as risk appetite faltered, there was a recovery in confidence during the US session.
There were still important reservations over the Japanese economy and certainly little interest in buying the currency, especially given the longer-term fears over the government-debt profile. The dollar continued to find support on any significant retreat, but was unable to move much above 83 against the Japanese currency.
Sterling
Sterling was unable to break resistance above 1.5880 against the dollar on Friday, but it held a solid tone and also advanced to near 0.84 against the Euro.
The latest Rightmove house-price index recorded an increase in prices of 0.3% for January following a 3.0% decline the previous month. This may provide some degree of relief, but there will still be a high degree of unease over the medium-term outlook.
There was a sharp 3.4% increase in producer input prices for December and, although the increase in output prices was still contained, the data will fuel inflation concerns, especially with fuel prices rising sharply. The consumer inflation data will also be watched closely on Tuesday and a higher than expected reading would reinforce pressure for higher Bank of England interest rates.
These expectations will tend to provide near-term Sterling support, but the medium-term risk profile is liable to remain unfavourable for the economy and currency.
Swiss franc
The franc found support close to 1.2950 against the Euro on Friday and strengthened back to the 1.2880 area, although there were still sharp losses for the weak as a whole. The dollar was unable to regain the 0.97 level and consolidated in the middle of the range after finding support near 0.96.
At meetings with industry groups, the government continued to warn over the impact of franc strength, but it also re-iterated that only the National Bank can act on the franc. There will be further doubts whether the central bank will decide to intervene and this will tend to curb further franc selling. The Swiss currency will also regain ground if Euro-zone tensions intensify again.
Source: VantagePoint Intermarket Analysis Software
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Australian dollar
The Australian dollar initially consolidated near 0.9980 against the US currency on Friday, but then came under fresh selling pressure with lows near 0.9850. Underlying confidence in the currency remains slightly weaker and there was further selling pressure following the latest Chinese monetary tightening.
There were fears that the Chinese economy could slow more sharply than expected which would also curb regional demand and put downward pressure on commodity prices and lessen Australian dollar support. The currency was unable to regain the 0.9920 area in Asia on Tuesday and re-tested support near 0.9850.
